BUY CMEC [1829.HK] May 19, More new flow on overseas contract is expected to come under, upgrade to BUY. Infrastructure Sector

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1 CMEC [9.HK] More new flow on overseas contract is expected to come under, upgrade to BUY A total of US$21bn of major economic corporation contracts were signed (or reinforced) after the visiting activities carried out by senior China government officials and overseas governments such as India, Russia, Kazakhstan, Belarus, Indonesia and Pakistan recently after the official launch of the document on vision and action for One Belt One Road (OBOR) from NDRC. New contract flows of overseas and project delivery growth, according to Ministry of Commerce (MOC), are accelerating in Q1 21. We expect CMEC, as one of major operating arms of China for overseas infrastructure construction, will be benefited from the aggressive going out of China. We roll over our valuation from FY1E to FY1/1E and increase our target valuation such that it can be comparable to international players. Our new TP: HK$.9, representing 1x FY1/1E PER, upgrade to BUY. May 19, 21 Infrastructure Sector BUY (Upgrade) Close: HK$ 9.9 (May 1, 21) Target Price: HK$.9 (.2%) More overseas contracts expected from OBOR. Following visiting activities of senior government officials, we see more new contract was signed in overseas. The recent activities included meeting presidents of countries in Southeast Asia and South America. After these meetings, China would sign batches of economic cooperation contracts with the governments for a total consideration of the contracts we estimate to be amounted to US$21bn. CMEC, as one of China s major operation arms on overseas infrastructure construction, will be benefitted from going-out of China. Revenue from overseas accounted for 1.1% of revenue in FY1. Overseas new contract up % YoY. According to MOC, total new contract amount from overseas projects increased by % YoY in Q1 21, while amount of delivery increased 1% YoY during the same period. Both indicators accelerated from -.% YoY and 7.2% YoY in Q1 21 (11.7% YoY and.% YoY in full year 21), respectively. According to management, new contract and project delivery in the first four months of 21 were in line with their full year expectation, with large size contracts are expected in 2H. Full year new contract target 21 of CMEC is US$.bn, up 17% YoY (vs. target 21 at US$bn. Actual contract amount was US$.bn in 21). We believe CMEC can beat its new contract target in 21 based on China s aggressive overseas development. Roll over our valuation and upgrade to BUY. After discussing with management, we maintain our long term positive view on CMEC for its growth in overseas businesses, and our earnings forecast. We roll over our valuation from FY1E to FY1/1E, our new target price is HK$.9 (original: HK$ 7.), representing 1x FY1/1E EPS, which is equal to weighted-average on valuation of international and domestic players in accordance of revenue-mix of CMEC. As the development progress of OBOR is faster-than-we expected, we expect more news flow on overseas contract is coming, upgrade CMEC from HOLD to BUY. Share Price Performance (HK$m) May-21 Aug-21 Nov-21 Feb-21 Turnover (RHS) Price (LHS) Market Cap US$,72m Shares Outstanding,m Auditor Deloitte Free Float 1.% 2W range M average daily T/O HK$ US$m Major Shareholding SINOMACH (77.99%) Y/E Dec E 21E Revenue (RMBm) 21,29 21,2 2, 27,71 29,2 Core Net Income (RMBm) 1,92 1,99 2,22 2, 2,72 Core EPS (RMB) Growth (%,YoY) (17.) P/E (x) BVPS (RMB) P/B (x) DPS(RMB) Yield (%) ROAE (%) Net gearing (%) Net Cash Net Cash Net Cash Net Cash Net Cash Sources: Company, CGIHK Research estimates Steve Wong (2) 9-91 stevewong@chinastock.com.hk Wong Chi Man - Head of Research (2) 9-17 cmwong@chinastock.com.hk 1

2 Figure 1: Financial statements Consolidated income statement Consolidated balance sheet FY Ended Dec 1 (RMBm) 2A 21A 21A 21E 21E FY Ended Dec 1 (RMBm) 2A 21A 21A 21E 21E Revenue 21,29 21,2 2, 27,71 29,2 Current assets 27,9 2,9 1,7,29 9,9 Construction operation 1,2 1, 1,1 19,9 2,9 Cash and equivalent 19, 1,2 22,2 2,7,9 Trading 7,1,9,,9 7,9 Trade and bill receivables,2 2,,,, Other 1, 1, 1,179 1,29 Construction contracts,191 2,7 2,7 2,19 1,77 Inventories Less: COGS 17, 17, 19,2 2, 2, Other current assets 2,9 2,9 2,71 2, 2,9 Gross profit,72,72,7,29, Non-current assets,,9,77,1,1 Less: SG&A 1, 1,71 1, 1,99 2,99 Property, plant and equipment ,97 Add: Other gains (loss) () 1 (29) 1 9 Land lease prepayment 1,27 1,7 1,7 1,7 1, Operating profit 2, 2,2 2,71 2, 2,9 Intangible assets Trade and other receivables Add: Net fin income (cost) Construction contracts,11,22 2,9 2,1 1,727 Add: JV, associate & others - () 2 11 Other non-current assets 1 1 2,79, Pre-tax profit 2,1 2, 2,7,119, Total assets,77 1,9 7,22 2,7 7,1 Less: Income tax Total net profit 1,92 1,9 2,97 2,1 2,7 Current liabilities 2,271 19,79 2, 27,2, Trade and bill payables 9,9,77,9 1, 1,29 Less: Minority interests - 1 (1) Receipts in advance,7 7,22 9,17,1,1 Net income 1,92 1,99 2,97 2,9 2,72 Short term borrowings Core net income 1,92 1,99 2,22 2, 2,72 Other current liabilities 1,1 1,71 1,71 1, 2,7 Core EPS (RMB) DPS (RMB) Non-current liabilities Long-term borrowings 1 EBIT 2,1 2, 2,91,222,2 Other non-current liabilities EBITDA 2,79 2,99,2,,719 Total liabilities 2, 2,197 2,17 27,992,7 Minority interests () Shareholders' equities 9,92 11,7 1, 1,9 1,7 BVPS Consolidated cash flow statement Key operating and financial ratios FY Ended Dec 1 (RMBm) 2A 21A 21A 21E 21E FY Ended Dec 1 (RMBm) 2A 21A 21A 21E 21E Profit before tax 2,1 2, 2,7,119, Sales mixed (%) Depreciation and amortization Construction operation Change in working capital, (1,7) 2,,, Trading Net finanical cost Others Income tax paid () (9) (9) (711) (1) Others (1) Profit & loss ratios (%) CF Operating 7,2 (1),1, 7,2 Gross margin Net profit margin Increase in PP&E (1) () (2) (1) (1) Effective tax rate (2.) (2.) (2.1) (2.) (2.) Increase in intangible assets (27) (9) 1 () () Others (2,2) 2,9 (7) (2,27) - Growth (%) CF Investing (2,9) 2,7 (11) (2,779) (1) Revenue Gross profit Capital injection, EBIT Net debt financing (97) EBITDA Dividend payout () (7) (7) (9) (99) Core net income Interest paid (11) (7) () (72) (9) Others (1) 1-7 (1,27) Balance sheet ratios CF Financing 2,9 () (7) (11) (2,2) Current ratio (x) Quick ratio (x) Net change in cash,92 2,9,2,27,2 Cash ratio (x) Cash at the beginning 9,1 19, 1,2 22,2 2,7 Trade & bill receivables days 9 7 Time deposit & FX effect 2, (,1) Trade & bill payables days Cash at the end 19, 1,2 22,2 2,7,9 Inventory turnover days Total debt / equity ratio (%) Net debt / equity ratio (%) Net Cash Net Cash Net Cash Net Cash Net Cash Sources: Company, CGIHK Research estimates Returns (%) ROAE ROAA Payout ratio

3 Figure 2: Monthly new contract from overseas by Chinese enterprises and YTD growth Figure : Monthly contract delivery from overseas by Chinese enterprises and YTD growth (US$ bn) (% YoY) (US$ bn) (% YoY) () (2) () () (2) Monthly new contracts value for overseas project (LHS) YTD Growth (RHS) Sources: MOC, CGIHK Research Monthly contracts delivery value for overseas project (LHS) YTD Growth (RHS) Sources: MOC, CGIHK Research Figure : Valuation of international peers BOUYGUES SA FLUOR CORP CIMIC GROUP LTD ACS Max since 2.2 Max since 2. Max since Max since 2 9. Mean since 2 1. Mean since Mean since 2 1. Mean since 2 1. Min since 2 7. Min since Min since Min since percentile percentile 2. 9 percentile percentile 2. percentile 1. percentile 2.1 percentile 1. percentile 1. Upper quartile 1. Upper quartile 22. Upper quartile 1.27 Upper quartile 1. Median 11.2 Median 2.1 Median. Median.9 Lower quartile. Lower quartile 1.1 Lower quartile Lower quartile.2 FY1E PER.2 FY1E PER 1.2 FY1E PER 1.7 FY1E PER 1.1 FY1E PER 2. FY1E PER 1.2 FY1E PER 1. FY1E PER 11.9 HOCHTIEF AG VINCI SA STRABAG SE-BR Average Max since 2 2. Max since Max since 2. Max since 2 1. Mean since 2 1. Mean since Mean since Mean since 2 1. Min since 2.99 Min since 2. Min since 2. Min since percentile percentile.97 9 percentile.1 9 percentile 2.1 percentile percentile.1 percentile 1.92 percentile 17. Upper quartile 21.2 Upper quartile.11 Upper quartile 17. Upper quartile 1.7 Median 1. Median 11. Median 1.9 Median 1. Lower quartile 1. Lower quartile. Lower quartile. Lower quartile. FY1E PER 1.2 FY1E PER 1.1 FY1E PER 1. FY1E PER 1.1 FY1E PER 1.7 FY1E PER 1.1 FY1E PER.1 FY1E PER 1.2

4 Figure : Valuation method CMEC Valuation factors Figure Rationale Domestic players' ceiling (9 percentile) of PER trading band (X).9 <-- Reference from domestic peers due to short listing history of CMEC Weighting (%) 2. International players average PER (X) 1.7 <-- Under OBOR development strategy, market rerating Weighting (%). <-- Contribution of international businesses for CMEC Weighted average (X) 1. Sources: CGIHK Research Figure : PER band of CMEC in M-M x 1.x.x.x.x.x Figure 7: PBR band of CMEC in M-M x 1.x 1.x 1.x 1.2x 1.x

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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >2% within months in absolute terms share price will decrease by >2% within months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM9 Room 1-7, /F, Cosco Tower, Grand Millennium Plaza, 1 Queen s Road Central, Sheung Wan, Hong Kong. General line: 9-.